TESTIMONY IN OPPOSITION TO HOUSE BILL 427 BEFORE THE COMMITTEE ON - - PDF document

TESTIMONY IN OPPOSITION TO HOUSE BILL 427 BEFORE THE COMMITTEE ON CIVIL AND COMMERCIAL LAW OHIO HOUSE OF REPRESENTATIVES MAY 18, 2010 Geoffrey J. Ritts My name is Geoffrey J. Ritts. I have been invited to appear at today’s hearing by the Ohio Alliance for Civil Justice. I am a partner in the Cleveland office of the Jones Day law firm, and an adjunct professor of law at the Case Western Reserve University School of Law, where I have taught courses on class actions since 2003. My legal practice focuses on class-action litigation, and I have been involved in more than 100 class-action lawsuits in state and federal courts across the nation, in such areas as securities law, corporate governance, employee benefits, products liability, mergers and acquisitions, and banking. I have also published and spoken widely on topics related to class-action litigation, and I am a co-author of a leading treatise on aggregated litigation in the state courts (Statewide Coordinated Proceedings: State Court Analogues to the Federal MDL Process, West Publishing, 1st and 2nd eds.). My testimony today is in my personal capacity and not as a representative of my law firm or any client. I am speaking solely as someone knowledgeable about class actions from having practiced, published, taught and spoken in the field, and as someone with a deep and abiding interest in class action law and procedure. PROBLEMS WITH HOUSE BILL 427 House Bill 427 is a deeply flawed piece of legislation that, if adopted, would undermine the fairness of the judicial process in class actions, open the door to significant ethical abuses, prejudice the rights of class members on behalf of whom class actions are brought, and damage Ohio’s business climate. The cy pres device has been subject to widespread abuse in class actions. Enacting this bill – which lacks any protections whatsoever against abuses – would invite misconduct and even corruption into the class-action litigation process. A fair and neutral judicial system is of paramount importance to all Ohio citizens and businesses, and the Legislature should not adopt any measure that would tend to undermine the impartial treatment of litigants in our courts. Because this bill would have that effect, it should not be adopted. What follows are what I believe are the main flaws in the bill:

1. House Bill 427 Invites Corruption And Abuse. Nothing is more important to our judicial system than its honesty and impartiality, in both appearance and fact. House Bill 427 would imperil that. The cy pres device already has been subject to significant abuse in class actions in Ohio and elsewhere, and legislation enshrining it as the public policy of this state would likely increase the incidence of those abuses. House Bill 427 has no mechanisms or protections whatsoever to guard against conflicts

• f interest. There is nothing in the bill to prevent cy pres distributions that directly or indirectly

benefit plaintiffs’ counsel or the presiding judge, and there is nothing in the bill requiring that a cy pres distribution have even the slightest relationship to the claims being asserted in the action

• r to the class on whose behalf the lawsuit is being brought.

For example, there is nothing in the bill to prevent a court from distributing cy pres funds to people who have business, political or family connections to the judge or plaintiffs’ counsel. There is nothing to keep cy pres funds from being directed to a judge’s (or plaintiffs’ counsel’s) law school or college alma mater. There is nothing to stop cy pres money from being directed to a non-profit that is run by a relative of the plaintiffs’ counsel or the judge. There is nothing to stop cy pres funds from going to a non-profit whose board includes political supporters of the judge, or even the judge himself. These sorts of cy pres distributions would raise the specter of corruption of the class-action process, and, in a world in which appearance is very often reality, undermine public confidence in the impartiality of the civil justice system. Unfortunately, these are not theoretical dangers. There are many real-world examples of questionable uses of the cy pres device, in Ohio and elsewhere. Here are a few, from just the last few years:

• In a case in Ohio, a cy pres distribution of almost a half-million dollars was directed

to a non-profit whose purpose was to buy “historically appropriate” furniture and accessories for the courthouse in which the presiding judge sat.

• In cases in Ohio and elsewhere, cy pres distributions have been directed to non-profits

that included sitting judges or their spouses on their boards of directors.

• In a case in Ohio, a cy pres distribution went to a plaintiffs’ bar organization

dedicated to underwriting and promoting class-action employment-law cases against

• employers. The Southern District of New York federal court has observed that

“many cy pres distributions are channeled to organizations that support the work done by plaintiffs’ attorneys, thus indirectly benefiting the plaintiffs’ attorneys.”1

• In an extreme case in Kentucky, millions of dollars were directed to a charity on

whose board of directors sat the presiding judge and three plaintiffs’ attorneys, each

1 SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 415 (S.D.N.Y. 2009).

• f whom was paid several thousand dollars for their “service.” The same settlement

resulted in a distribution of $1 million to the alma mater of one of the plaintiffs’ attorneys, which then hired the lawyer for $100,000 a year to do nothing. The judge eventually was removed from office and the lawyers were indicted.

• In a case in the District of Columbia, a cy pres distribution of over $5 million went to

the law school attended by the lead plaintiffs’ counsel. In a case in Tennessee, a cy pres distribution of almost $3 million went to the law school from which plaintiffs’ counsel graduated. In a Florida case, a cy pres distribution went to the plaintiffs’ counsel’s law school alma mater.

• In a West Virginia case, an $8 million cy pres award was directed to the law school

attended by the presiding judge. Nothing in House Bill 427 would impede any of these kinds of abuses. Indeed, under the bill’s terms, all of these cy pres distributions would be permissible, as long as the receiving

• rganization was tax-exempt. As these examples highlight, the cy pres device is susceptible to

misuse, and potential misuses are insulated from scrutiny by the notion that cy pres distributions merely “help charity.” Professor Samuel Issacharoff of the New York University Law School – who frequently represents or testifies on behalf of plaintiffs in class actions – has called cy pres “an invitation to wild corruption of the judicial process.” The American Law Institute, in its recently adopted Principles of the Law of Aggregate Litigation, has taken the position that cy pres distributions never should be permitted if “the court or any party has any significant prior affiliation with the intended recipient.”2 Rather than providing additional opportunities for corruption and abuse, we should be asking how we can protect and enhance the impartiality and integrity of our civil justice system. Instead of expanding the use of cy pres in class actions, we should consider how it can be restricted to put an end to its abuse. House Bill 427 is a step in the wrong direction. A further point: on a topic with such clear implications for judicial administration, judicial ethics and legal ethics, shouldn’t the input of the Supreme Court of Ohio and the Office

• f Disciplinary Counsel on this proposal be sought? To our knowledge, it has not been sought.3

2 American Law Institute, Principles of the Law of Aggregate Litigation § 3.07 cmt. b (2010). 3 A former federal judge who is now dean of the Duke University School of Law has said that the

distribution of cy pres funds “is not a true judicial function and can lead to abuses . . . . It made me more than a little uncomfortable that groups would solicit me for consideration as recipients of cy pres awards. I know that other judges felt that there was something unseemly about this system.” Adam Liptak, “Doling Out Other People’s Money,” New York Times (Nov. 26, 2007) (quoting Dean David F. Levi).

2. House Bill 427 Would Tilt The Playing Field Against Defendants In Class-Action Litigation, Thus Harming Ohio’s Business Climate And, Ultimately, Ohio’s Charities. Making cy pres the default rule would tilt the playing field against defendants in class-action litigation, by introducing extraneous considerations into the minds of judges and

• jurors. If the class-action litigation process is unfairly tilted against defendants, Ohio’s business

climate will suffer and businesses will find Ohio a less attractive place to locate or expand. Ohio’s charities would suffer as a result, because they receive many millions of dollars in donations every year from Ohio businesses and their employees. How would House Bill 427 tilt the playing field? It’s simple:

• Unless class actions are dismissed by a court, or class certification is denied, they

almost invariably settle. Certified class actions virtually never go to trial.4

• If cy pres becomes the default rule, judges will know that a class action will

eventually settle – and probably result in a cy pres distribution – if the court simply denies enough motions, or certifies a class, or otherwise lets the case continue long enough.

• Do we want a judge to think that if he grants a class certification motion, or denies a

summary judgment motion, he might get an antique desk out of it, or his law school

• r college might get a tidy contribution via a cy pres distribution?
• Do we want a judge to think that if she grants class certification, she will eventually

get to distribute a cy pres payment to a politically-prominent local charity that can deliver electoral support to the judge?

• In the unusual circumstance where a class action is tried, do we want jurors to think

that local charities might benefit if they decide in favor of the plaintiffs, regardless of the merits of the case?

4 A 2008 Federal Judicial Center study of 300 class actions found that 100% of the cases in which a class

was certified settled; not a single one was tried. Federal Judicial Center, “Impact of the Class Action Fairness Act

• n the Federal Courts: Preliminary Findings from Phase Two’s Pre-CAFA Sample of Diversity Class Actions”

(2008). As a prominent federal appeals court judge explained, companies simply cannot “roll the dice” on a potentially catastrophic verdict by a single jury in a class action, and so are under “intense pressure . . . to settle even if they have no legal liability,” once a class is certified. In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1297-98 (7th Cir. 1995) (Posner, C.J.).

• Judges and jurors will be more likely to sustain marginal claims if they think that

charities will benefit, instead of just a plaintiff. Adding a potential cy pres distribution into the mix in every class action in an Ohio state court would tempt judges and juries to take into account factors other than the merits as they make their decisions. The Legislature should not enact legislation that creates such a temptation. A fair and even-handed system of civil justice is of paramount importance to Ohio’s business climate and to the long-term welfare of its citizens and charities. The Legislature should not do anything that will cause Ohio citizens or businesses to question the ability of our state’s courts to decide disputes in a fair and neutral fashion. 3. House Bill 427 Would Undermine the Interests of Absent Class Members. The members of the class are supposed to be the sole beneficiaries of a class action. The class members effectively are the clients of class counsel, and class counsel owes serious ethical duties to them. Class counsel is supposed to devote his efforts to advancing the interests of the class, and to maximizing the recovery to class members. Class counsel is not allowed to place his personal interests or the interests of an organization that is a stranger to the case before the interests of the class. But House Bill 427 would give class counsel the incentive to do just that. As noted previously, the cy pres device has been subject to widespread abuse – cy pres distributions have been directed to pet charities of class counsel; they have been used to curry favor with courts; they have been used to underwrite and support the bringing of further class- action litigation by the plaintiffs’ bar; they have been used as a form of advertising for plaintiffs’ law firms. In each such instance, class counsel is allowing the proceeds of the action to benefit someone other than the class. Given the substantial personal interests that class counsel can serve via cy pres distributions, there are powerful incentives for class counsel to make sure that there are funds left over for a cy pres distribution – which means making sure that the proceeds

• f the action do not go entirely to the class.

Where a possible cy pres distribution looms, class counsel therefore will have the incentive not to make sure that all class members get notice of a proposed settlement, not to make sure that as many class members as possible submit claim forms, and so forth. Because class counsel gets a greater personal benefit from a dollar going to a cy pres recipient than to a class member, the cy pres device encourages class counsel to disregard his duties to the class. There is yet another way that House Bill 427 would tend to undermine the interests of class members. Nothing in the bill requires that the recipient of a cy pres distribution have any relationship whatsoever to the class on whose behalf the lawsuit was brought, or to the claims at issue in the case. This bill would permit the lion’s share of a settlement fund (after deducting

• ne-third for class counsel’s attorney’s fees, to be sure) to be diverted to a cy pres recipient that

provides zero benefit to any member of the class. This is not an uncommon problem in cy pres

• distributions. For example, in a recent case arising out of a hotel fire in Puerto Rico, the court
• rdered a cy pres distribution not to a charity in Puerto Rico, and not to a non-profit focused on

fire safety, but to the Animal Legal Defense Fund in California. The Animal Legal Defense Fund may be a worthwhile charity (or not). But that is not the point. The point is that the

charity’s works had nothing to do with the lawsuit, and giving it money did not serve any of the goals of the underlying case or help the class members. Similarly, when a cy pres distribution is made to the law school that the judge or class counsel attended, that does nothing for the class. But under House Bill 427, those kinds of distributions would be entirely permissible. All of this is a long way of saying that what this bill proposes is not “cy pres” at all. When the cy pres doctrine is applied in the area of trusts and estates law – where it originated and to which it should be confined – courts interpret it to mean that the funds in question should be directed to a use that best approximates the original intent of the testator.5 After all, the phrase from which the term “cy pres” derives means “as close as possible.”6 That principle, however, finds no expression in House Bill 427. Not only are cy pres distributions under the bill not required to be “as close as possible” to a distribution to class members, but under the bill a cy pres distribution need not have any relation at all to the class members.7 House Bill 427 conflicts with the American Law Institute’s Principles of the Law of Aggregate Litigation, which was recently adopted after a five-year study process involving leading jurists, scholars and practitioners. The ALI determined that cy pres distributions never should be permitted where further distributions to class members are feasible. Thus, in a case where some class members make claims against a settlement fund but a portion of that fund remains unpaid at the end of the claims process, the ALI would require a second distribution to the claiming class members, rather than cy pres. In the rare circumstance where a further distribution to class members would not be feasible, the ALI’s position is that a cy pres

5 See, e.g., Restatement (Second) of Trusts § 67 (2003). 6 “Cy pres comme possible.” 7 Moreover, even if a cy pres distribution provided little or no benefit to the class, House Bill 427 still

would permit the value of the cy pres distribution to be counted in calculating the plaintiffs’ lawyer’s contingency

• fee. (In other words, a settlement that ended up paying $1 million to the class but $5 million in a cy pres distribution

to the law school that the judge attended would result in an attorneys’ fee not of $333,333 (1/3 of $1 million), but $2 million (1/3 of $6 million).) Even though the plaintiffs’ counsel in this example delivered only $1 million in benefit to his clients, he would be paid the same as if he had delivered a $6 million benefit to them. Under these circumstances, the plaintiffs’ counsel would have a perverse incentive to minimize the benefits actually delivered to his clients: he would be paid the same if a substantial cy pres distribution were made, and would enjoy collateral personal benefits from the cy pres distribution that he would not receive if the funds went to the class members.

distribution may be made only to a recipient “whose interests reasonably approximate those being pursued by the class,” and never to a recipient with prior connections to the court or plaintiffs’ counsel.8 4. House Bill 427 Will Spawn Marginal Litigation. Cy pres distributions often are used to generate more class-action litigation. There is nothing in House Bill 427, however, to prevent cy pres awards from going to non-profits with litigation-related agendas, which then would use the money to spawn more litigation. If this legislation is enacted, we should expect to see cy pres payments in toxic tort cases or products liability cases funneled into organizations that are dedicated to plaintiffs’-side junk science. As noted above, the main plaintiffs’ bar proponent of this legislation already has directed cy pres distributions to the “National Litigation Strategy Project” of an organization that supports employment-related class-action litigation. The Legislature has made significant advances in recent years in the area of civil justice reform, discouraging the filing of meritless lawsuits so that our courts can operate more

• efficiently. Adopting this bill would be a step backwards.

5. House Bill 427 Will Make Ohio A Magnet for Class-Action Litigation. House Bill 427 would tend to increase fee awards to plaintiffs’ attorneys in class actions, by increasing the base upon which percentage fee awards are calculated. By increasing fees for class counsel, and by giving class counsel an opportunity to serve their personal interests through a cy pres distribution, House Bill 427 will result in class actions being filed in Ohio courts that

• therwise would not have been filed, or that would have been filed elsewhere. There is no

reason to make Ohio a magnet for class-action litigation, with the consequent burdens on Ohio courts, businesses and taxpayers. 6. House Bill 427 Is Not Necessary. Under existing law, parties already can agree to a cy pres distribution as part of a settlement (subject to court approval). There is no need for legislation making cy pres the rule in class action settlements. 7. House Bill 427 Is Economically Inefficient Social Engineering. As noted above, once a class action is certified, the defendant has little practical choice but to settle, regardless of the merits of the case. In such settlements, there has been no adjudication of wrongdoing, and the settlement agreement typically states that the defendant denies any liability and is entering into the settlement solely to avoid the expense and risk of further litigation. Indeed, recent class action settlement agreements entered into by the bill’s

8 American Law Institute, Principles of the Law of Aggregate Litigation § 3.07 & cmt. b (2010).

chief proponent have contained such denials. Given these facts, it is simply incorrect (but highly inflammatory) to say that this bill has anything to do with “guilty” defendants that have “stolen” money, as suggested in some of the proponent testimony. When you consider the realities of class action settlements, it is apparent that House Bill 427 actually is an economically inefficient form of wealth redistribution. There is no basis to conclude that it is more socially beneficial for a residual fund to be directed to a non-profit that may have been selected because of its ties to a plaintiffs’ lawyer or judge, rather than that money being returned to the defendant to be used to invest in plant or equipment or to hire new employees.9 8. House Bill 427’s Constitutionality Is Questionable. The Ohio Constitution’s Modern Courts Amendment of 1968 granted the Supreme Court

• f Ohio the power to make rules governing procedural matters, with the Legislature having the

power only to approve those rules submitted by the Supreme Court.10 The procedural matters reserved to the Supreme Court include procedures in class actions. Because House Bill 427 would define procedures to be applied in class action settlements -- a topic already covered by Civil Rule 23 -- it is at best unclear that the bill falls within the constitutional authority of the Legislature. * * * * To sum up, this bill is bad for all Ohioans – businesses, charities and regular citizens

• alike. In the long run, none of us would benefit if our state’s civil justice system were to become

less fair and neutral. We should look for ways to uphold our court system as a model of integrity and efficiency, and reject proposals that could open the door to shady dealing or even the

9 Moreover, the judiciary lacks the institutional competence to make determinations about which non-

profits are more “deserving” than others. “Distributing grants and reviewing the effectiveness of their use is not an appropriate use of judicial resources and transforms courts into eleemosynary institutions.” SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 404, 415 (S.D.N.Y. 2009)). One federal judge has written that judges are not generally equipped to be charitable foundations: we are not accountable to boards or members for funding decisions we make; we are not accustomed to deciding whether certain nonprofit entities are more “deserving”

• f limited funds than others; and we do not have the institutional resources and

competencies to monitor that “grantees” abide by the conditions we or the settlement agreements set. In re Compact Disc Minimum Advertised Price Antitrust Litig., 236 F.R.D. 48, 53 (D. Me. 2006).

10 Ohio Const. Art. IV, § 5(B).

suspicion of it. While this bill may seem straightforward and innocuous on its face, in truth it is anything but. I urge the committee not to approve it. Thank you.